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Thursday, September 12, 2013

Stock analysis: Textainer Group Holdings

Textainer Group Holdings Limited and its subsidiaries
(“Textainer”) is the world's largest lessor of intermodal containers based on
fleet size. The Company began operations in 1979 and as of the most recent
quarter end had more than 1.9 million containers, representing more than 2.8 million
TEU, in its owned and managed fleet. Textainer leases dry freight,
refrigerated, and specialized containers. Each year the company is one of the
largest purchasers of new containers as well as one of the largest sellers of
used containers. Textainer leases containers to approximately 400 shipping
lines and other lessees and sells containers to more than 1,000 customers
worldwide and provides services worldwide via a network of regional and area
offices, as well as independent depots. (Source: Financial Tear Sheet TGH, as
of September 7)

Revenue and earnings
growth

Since 2006 total revenue has grown at 14% CAGR. In the first
6 months of 2013 revenue has grown 9% compared to the first 6 months in 2012.
Earnings Before Interest Tax Depreciation Amortization (EBITDA) has grown even
faster in this period, about 20% CAGR.

According to TGH the container trade has grown roughly
between 1.5 and 2.5x the growth in global GDP. Global growth in GDP is therefore
one of the key determinants in the financial well being of TGH. If
BRIC-countries are not contributing to GDP growth, that’s bad for business.
Although economic indicators in US-markets are looking better, the Euro-zone is
still lacking. Times are still uncertain but the advantage is that TGH can
react quickly to changes in supply/demand conditions. TGH has been profitable
for the last 27 years which shows consistent business performance.

Debt

TGH carries a significant amount of debt. The ratio of debt
to equity has increased in recent years to 2.3 although this ratio has been
quite stable over the last 6 quarters. This ratio is higher than I’d normally
like, but the interest coverage ratio has been constant at 4-4.5x which is
usually regarded as enough. The debt is used to increase assets (containers) and
is not used to fund regular operations. Even so, I’d like to monitor these debt
levels closely.

Cash-flow

Cash-flow is negative in the last quarters. Even though cash
from operations is positive and growing on a TTM-basis, the capital
expenditures on new containers puts cash-flow in the red numbers. This money is
raised by issuing long-term debt as mentioned above.

Dividend

TGH has paid at least stable dividends for 24 consecutive
years and has increased it on an annual basis since 7 years. It’s a dividend
challenger on David Fish’ CCC-list. The stock currently yields 5.4%. Its
5-year DGR is 52% which is obviously quite high although the payout-ratio
(based on EPS) is a respectable 47%.

Outstanding shares

The number of outstanding shares has increased from 49M in
2011 to 56M in 2013. I am not overly fond of this development since it dilutes the
ownership of the company.

Valuation

Price/sales-ratio: in the last 7 quarters the price to sale
ratio has moved between an average bandwidth of 3.2 – 4.0x revenue per share.
With the last quarter revenue per share (LTM) of $9.2 this puts the valuation
of the company between $30 and $37 per share.

Price/earnings-ratio: in the last 7 quarters the price to
sale ratio has moved between an average bandwidth of 7.6 – 9.5x earnings per
share. With the last quarter earnings per share (LTM) of $3.77 this puts the valuation
of the company between $28 and $36 per share. The PE-ratio has steadily increased
in the last quarters, so compared to the end of 2011 the current stock price is
relatively high.

Dividend yield: in the last 8 quarters the dividend yield
has moved between an average bandwidth of 4.5 - 5.7%. With its latest quarterly
dividend increase to $0.47 this puts the valuation of the company between $33
and $42 per share.

Dividend Discount Cash Flow-analysis: using an earnings growth
rate of 6% for the next 10 years (conservative!) and half of that as perpetual
growth thereafter, using a 10-year dividend growth rate of 12% and 3% as
perpetual dividend growth rate, the estimated fair value of the stock is around
$50 (considering a holding period of 30 years).

Summary

Textainer is growing revenues and earnings on a consistent
basis. The properties of this dividend stock are great, high current yield and
high dividend growth rate. Debt levels and the increase in outstanding shares
need to be monitored but according to different valuation methods TGH seems to
be fairly valued at this point. If you think that the global economy shows signs
of recovery than TGH just might be a nice stock for you as a dividend growth
investor.

What do you think of
TGH? Do you like this company enough to add it to your portfolio?

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